“Bust in oil prices trigger mergers and acquisitions”
Just as night follows day, busts follow booms in the oil industry, and that leads to mergers and acquisitions to clean up the damage.
“Now you’re going to see a stricter review and evaluation, and that’s probably going to end up then being a catalyst to require some borrowers to start selling off some properties, put up some more collateral or pay off some of the loans,” said Hunter White, a lead energy attorney at Thompson Knight in Houston.
When approaching acquisitions, buyers need to make sure they fully understand what will likely be a complicated debt picture, White said. Big-ticket liabilities can be obvious, while some smaller contracts can be treacherous.
“Are they overpaying for gas, or are they receiving less than they should for oil on long-term contracts?” White said. “You are not likely to get a seller who is willing to represent and warrant to you that they’ve never entered into a stupid contract.”
Whenever possible, it’s a good idea to know why the company is selling. Is it a fire sale? Is there a private equity firm trying to make an exit? Is this a case of bad timing, too much debt or has the seller lost faith in the company’s assets?
Buyers should also remember they are not the only ones who see opportunity in the downturn.
“What people have to remember is that there is a lot of money waiting on the sidelines,” White cautioned. “You’ve got a lot of investors coming out of the woodwork who have no knowledge of this particular area and maybe want to gain entrance.”
So what is the worst thing a buyer can do?
“The biggest mistake people are going to make is thinking they know what prices are going to do,” he said.
The oil price bust so far has not been as hard on oil companies as past down cycles. And while this one is far from over, there are signs the market is behaving rationally, with strong companies buying out weak.
Perhaps that’s because we know that day follows night, and another boom is on the horizon.